Eastman Chemical Company — Q1 2014 Form 10-Q
Reporting period: Unaudited quarter ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales | $2,305 | $2,307 |
| Gross profit / margin | $595 / 25.8% | $616 / 26.7% |
| Operating earnings / margin | $361 / 15.7% | $393 / 17.0% |
| Net earnings attributable to Eastman | $233 | $247 |
| Diluted EPS | $1.52 | $1.57 |
| Operating cash flow | $(30) | $5 |
| Capital expenditures | $122 | $87 |
Q1 2014 adjusted operating earnings, excluding Solutia integration costs and asset impairments/restructuring, were $383 versus $403; adjusted diluted EPS was $1.61 versus $1.62. These are company-presented non-GAAP measures.
At March 31, cash was $185, current assets were $2,949, and current liabilities were $1,259. Total borrowings were $4,635, all classified as long-term, versus $4,254 at year-end 2013. Available borrowing capacity under the revolving credit and receivables facilities was $443, down from $825 at year-end. The company reported compliance with facility covenants. Total equity was $3,808.
Material changes and segment results
- Sales were essentially flat, while operating earnings fell 8% and Eastman-attributable net earnings fell 6%. Gross profit declined $21, primarily as higher raw-material and energy costs, especially propane, outpaced price increases in SFI.
- SFI operating earnings declined to $64 from $95, reflecting higher input costs, lower specialty-fluids volume, and a $6 weather-related outage cost at Longview, Texas.
- Fibers operating earnings rose to $117 from $114, supported by higher selling prices. AFP fell to $94 from $98; Adhesives & Plasticizers fell to $47 from $49.
- Advanced Materials reported operating earnings of $61 versus $65, including $10 of impairment and restructuring charges. Excluding those charges, earnings were $71 versus $65.
- Operating cash flow shifted to an outflow, mainly due to inventory growth of $116 (versus $53 in Q1 2013) ahead of planned maintenance and higher variable compensation. Financing included $260 of share repurchases; the company repurchased 3.17 million shares during the quarter.
Outlook, commentary, and risks
- Management expected 2014 revenue growth of approximately 3%, roughly global GDP growth, and diluted EPS of $6.70–$7.00, excluding non-core or non-recurring items.
- Other 2014 expectations included approximately $1.4 billion of operating cash flow, $600 of capital spending, and a reported-earnings tax rate of approximately 28%. The company expected to fund growth initiatives, dividends, and repurchases; it also expected $120 of U.S. pension contributions.
- Management warned that propane cost volatility was expected to pressure earnings, particularly in SFI and especially in the first half of 2014. Planned manufacturing maintenance was expected in Q2 and early Q3.
- Growth plans included capacity expansions and proposed acquisitions: Commonwealth Laminating & Coating, expected to close in the second half of 2014, and BP’s aviation turbine engine oil assets, expected to close in Q2. Completion, integration, demand, and project timing remain uncertain.
- Environmental reserves totaled $355, including a best-estimate remediation liability of $334; reasonably possible future remediation costs were estimated up to $575. Management did not expect these matters to be material to consolidated financial position or cash flows, though individual-period results could be affected.
- The company received a Texas environmental enforcement notice alleging air-quality and permit violations at the Longview site; it intended to contest the allegations and did not expect a material financial impact. Management also identified commodity and energy costs, operating disruptions, global economic conditions, customer concentration, growth-project execution, acquisitions, and regulatory requirements as risks.
Most important facts for investors to verify
- Whether SFI’s earnings pressure from propane and other input costs persisted beyond the first half of 2014.
- Whether the inventory build converted to operating cash flow after planned maintenance, and whether full-year cash-flow guidance was achieved.
- Progress on the $600 capital-spending plan, capacity expansions, and the two proposed acquisitions, including costs, timing, and integration outcomes.
- Repurchase pace and funding: $260 spent in Q1, alongside increased borrowings and $443 of remaining facility availability at quarter-end.
- Developments in environmental remediation estimates and the Longview enforcement action, including any material change in expected liability or cash needs.